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A business cycle is an alternate expansion and contraction in the overall business activity as evidenced by fluctuations in the measures of aggregate economic activity such as:  Gross Product  Industrial Production  Employment & Income

Major Cycles: 8-10 years Minor Cycles: 2-3 years Long Waves Cycles: 50-60 years

Level of economic activity

Time Full Employment line

The lowest point of a business cycle is known as Depression and is characterized by:

The phase of transition from a pessimist economy to an optimist economy is termed as Revival/Recovery.  Banks expand credit  Production slowly increases  Demand for capital, raw material and labour also increases  Inventions and innovations characterize this phase

The prosperity(Expansion) phase refers to a state where the economy attains maximum growth with full employment and the movement of the economy is beyond full employment.  The investment activity picks momentum  Stock markets start functioning vigorously  Prices & Profits also rise influencing further investment  Economy experiences Full employment

The transition from boom to depression is called Recession.  Profits decrease so business activities reduce  Unemployment increases  Demand decreases  Income, expenditure and prices decrease  Leads to a decline in overall business activity

Boom

Level of economic activity

Full Employment line
ival

Depression Time

Rev

ce s Re n sio

Prosperity

CAUSES OF BUSINESS CYCLES

Revival Expansion

BOOM

Recession Depression

Innovation in business is the main cause of increase in investments & business fluctuations.

No excess productivity No government interference or foreign trade 1 year lag between income and consumption Lag between consumption and investment Income of any year can be estimated by knowing the incomes of the previous two years, marginal propensity of consumption and the output-to-capital ratio.

Autonomous investment is a function of current output Induced investment depends on the equilibrium growth rate The income is bounded by a ceiling and a floor